New BoE governor Mark Carney open to policy review

The new Bank of England governor Mark Carney. Picture: PA

MARK Carney, the Canadian who will become the Bank of England’s governor this summer, said on Thursday that he is open to a review of Britain’s monetary policy framework, potentially paving the way to a more growth-oriented approach in Europe’s third-biggest economy.

• Mark Carney has suggested that central banks should consider giving more weight to economic growth

Bank of England governor-in-waiting Mark Carney speaking at the House of Commons Treasury Select Committee at, Portcullis House. PRESS ASSOCIATION Photo. Picture date: Thursday February 7, 2013. Mr. Carney today insisted his more than �800,000-a-year pay and perks package was "equivalent" to that of outgoing boss Sir Mervyn King.
In his first hearing with MPs ahead of taking up the job in July, Mr Carney defended his controversial pay deal - which includes a �250,000 housing allowance - as being in line with that of Sir Mervyn on a "pay and pension" basis. But MPs on the Treasury Select Committee questioned whether he was concerned about "resentment" among Bank of England staff, given that their pay has been frozen for two years. See PA story POLITICS Governor. Photo credit should read: PA Wire

• Review will look at alternative ways of getting above-target inflation back down

• Carney takes over this summer

Carney has in the past suggested that central banks like the Bank of England, whose exclusive mission is to keep inflation stable, should also consider giving more weight to economic growth, as the U.S. Federal Reserve does. That has raised speculation that he might look to push for an overhaul of the Bank of England’s policies when he takes over in July.

Addressing an influential U.K. parliamentary committee, Carney indicated that while “the bar for change” to the current inflation-targeting regime should be high, it makes sense to review the policies every few years.

“The flexible inflation-targeting framework should remain broadly in place, but details need to be reviewed and could be changed,” said Carney, who will become the first foreign governor of the Bank of England in its near 320-year history.

Among the measures that could be adopted is a reference to unemployment or providing markets with longer-term guidance, similar to the approach of the Fed.

While Carney was speaking, the central bank’s rate-setting Monetary Policy Committee kept its main interest rate at the record low of 0.5 percent and decided not to pump more money into the economy.

In an unscheduled statement, it noted that it does consider economic growth in its assessments in as far as it affects inflation.

The MPC was established in 1997 when the Bank of England was granted its independence. The bank has been tasked to set interest rates to make sure inflation is at 2 percent two years out. But inflation has been stubbornly above that for much of the period since the financial crisis erupted in 2007. It is currently at 2.7 percent.

In its statement, the MPC said inflation was likely to remain above target for the next two years but that it should then fall back to around the target thereafter.

The traditional way of getting above-target inflation back down is to raise interest rates. But that could inflict huge damage to businesses as well as consumers at a time when the economy is already in the doldrums. In the final three months of 2012, the British economy contracted by a quarterly rate of 0.3 percent.

Carney confirmed he has had a couple of higher-level discussions with British finance chief George Osborne about the “merits of looking at the remit.” Osborne has the power to alter the mandate and has signaled recently that he may be open to a change.

“Change is in the air for the U.K.’s monetary policy,” said Tim Ohlenburg, senior economist at the Centre for Economic and Business Research.

Carney will replace long-time governor Mervyn King, who has been accused by some former MPC members of being overly dominating. Offering awshucks charm interspersed with a beaming smile that has earned him the moniker of “George Clooney of central banking,” Carney insisted he would be collegiate.

But he made no apology for accepting a pay package in excess of 800,000 pounds.

“I was offered these terms and I accepted them,” he said.

The 47-year old from the remote northern town of Fort Smith in Canada’s Northwest Territories gained a bachelor’s degree in economics from Harvard University and master’s and doctoral degrees at Oxford. He also worked for Goldman Sachs.

He moved to the top job at Canada’s central bank just before the global financial crisis hit in 2008, and slashed interest rates to historic lows. He was the first central banker to commit to keeping those levels low - a step the Fed later followed. Under his leadership, Canada was spared a subprime lending crisis, and its banks are among the soundest in the world.

Carney said he would take the job for five years instead of the usual eight, adding the reason was related to the schooling of his children. He laughed off the notion that he was taking the job to create a career in Canadian politics.

“I’m surprised that it would be viewed as politically astute, that taking one of the most challenging jobs in central banking in another country would be viewed as politically advantageous in my home country,” he said. “If I had political ambitions, I would have pursued them in Canada.

At a glance, Carney on ...

The Bank of England’s independence from the government

“There will be no question about independence, my independence as Governor, the independence of the MPC [Monetary Policy Committee], the independence of the institution”

The central bank’s fallibility

“The Bank will make mistakes. All institutions make mistakes”

Consensual, not dogmatic rule at the Bank

“I cannot be an emperor. That cannot be the approach”

His £800,000 pay package, including allowances

“I’m moving from one of the least expensive capital cities in the world, Ottawa, to one of the most expensive capital cities in the world”

Pensioners suffering from low interest rates on their savings

“The responsibility of the bank is the broader economy and we have to keep that focus”

The European Union

“It’s in Britain’s interests that European monetary union works. We are moving from the acute phase of the crisis to the chronic phase”

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